Conditioning Carry Trades: Less Risk, More Return!

39 Pages Posted: 2 Aug 2015

See all articles by Arjen Mulder

Arjen Mulder

Erasmus University Rotterdam (EUR) - Department of Financial Management

Ben Tims

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Date Written: July 30, 2015

Abstract

We propose an easy-to-implement conditional currency carry trade (CT) strategy that excludes regimes for which UIP is likely to hold, namely when interest rate differentials (IRDs) are very large during high foreign exchange (FX) volatility regimes. We find that conditioning a CT strategy on both FX volatility and extreme IRDs outperforms the base-case unconditional CT strategy in terms of mean return, holding period return, Sharpe ratio, and skewness in virtually any of the settings analyzed. Conditioning on high FX volatility only, or on very large IRDs only shows mixed findings. Our strategy works best for smaller CT portfolios.

Keywords: Carry trade, international finance, uncovered interest parity

JEL Classification: E43, F31, G11

Suggested Citation

Mulder, Arjen and Tims, Ben, Conditioning Carry Trades: Less Risk, More Return! (July 30, 2015). Available at SSRN: https://ssrn.com/abstract=2637837 or http://dx.doi.org/10.2139/ssrn.2637837

Arjen Mulder (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Office T08-35
3000 DR Rotterdam, 3000DR
Netherlands
+31.10.4081929 (Phone)

Ben Tims

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
207
rank
140,681
Abstract Views
802
PlumX Metrics